U.S. dollar wraps strong 2005

RachelKoning

CHICAGO (MarketWatch) - The U.S. dollar gained modestly against key counterparts Friday, capping a year that featured a roughly 15% gain against the euro and the yen and pulled the greenback out of a three-year decline.

The dollar index, which compares the U.S. currency to a handful of the world's major currencies, was about to post a 13% gain for 2005, an annual rise not replicated since the late 1990s.

The dollar traded to its richest against the euro in nearly three weeks when the common currency broke below $1.18 briefly Friday morning. In late trading, the euro was changing hands at $1.1839, compared to $1.1837 late Thursday.

The euro was worth about $1.36 this time last year, the most against the dollar in its then six-year life.

"A sudden euro-dollar plunge through $1.18 has surprised a market that has been focused on crosses and looking ahead to early exits for the long holiday weekend," said currency analysts at Ried Thunberg ICAP, in an intraday update. "Given the limited liquidity, the price action needs to be taken with a grain of salt."

Most major financial centers will be closed Monday for the New Year's holiday.

The dollar was worth 117.85 yen, up 0.1% from 117.79 yen late Thursday and 102 yen in late 2004.

The British pound slipped 0.2% at $1.7206 compared to $1.7242 Thursday and $1.91 a year ago.

Analysts at Action Economics said some dollar gains Friday could be linked to a final round of U.S. corporate profit repatriation to take advantage of a temporary tax bonus under the Homeland Investment Act.

The analysts said dollar exuberance was likely checked by expectations Federal Reserve interest-rate meeting minutes due out Tuesday could offer more clues for timing of the eventual end to a string of policy tightening at the central bank that took U.S. rates to a four-year-high 4.25%. At least one more, and possibly two, interest-rate hikes are priced into futures markets.

The Fed's interest-rate increases made dollar-denominated markets appealing to foreign investors this year. Interest rates were little changed in 2005 in the other major economies.

Interest-rate focus turned attention, at least briefly, from concerns over the size of the U.S. trade deficit, which continues to be plugged by foreign investment in the United States. Most analysts were wrong in their predictions for continued dollar declines in 2005, but think trade-deficit issues could return to the fore in 2006.

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